Last Week in Retail, Part 1

 | Jan 12, 2014 | 6:00 PM EST  | Comments
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The week ending Jan. 10 brought a plethora of news that confirmed our fears: Promotional activity during the shortened holiday shopping season of 2013 wasn't just bad. It was cutthroat. Many retailers were left unable to recover from the ice and winter storms that ravaged much of the U.S. during December and early January. Bed Bath & Beyond (BBBY), Five Below (FIVE), Pacific Sunwear (PSUN), Sears (SHLD) and Zumiez (ZUMZ) all revealed difficult performance during the period.

The variant business models of those retailers suggest weakness was widespread. Surprisingly, even discount retailing giant Family Dollar (FDO) wasn't able to lower prices enough to keep customers in the stores. No category seemed to be spared.

Needless to say, we're not expecting much from retailers when they report fourth-quarter results in coming weeks, and while firms such as Macy's (M) and Urban Outfitters (URBN) offered some positive news this week, on balance the performance was "mostly bad" in the sector. Any upside surprises from retailers during fourth-quarter earnings season will be met with much applause by the equity markets, as it will reveal a management team that knows how to deliver. Still, a fourth-quarter beat is hardly any reason to own shares.

Bed Bath & Beyond

Domestic home-furnishings retailer Bed Bath & Beyond surprised the markets Wednesday by missing expectations for the fiscal third quarter (ended Nov. 30) on both the top and bottom line and issuing fourth-quarter guidance well below consensus targets. Comparable-sales growth slowed from the pace achieved in the prior-year period, and the company's gross margin fell as a result of the increased promotional environment during the shortened holiday season. The competitive environment has sent earnings expectations at the retailer in a tailspin, as shown by the substantially scaled-back earnings expectations for the current quarter and full year.

Family Dollar

On Thursday, Family Dollar reported financial results for first quarter 2014 (ended Nov. 30). The firm's comps decreased 2.8% for the period "as a result of decreased customer transactions and a slight decrease in the average customer transaction value." Family Dollar slashed its earnings outlook for the fiscal second quarter, to between $0.85 and $0.95, vs. $1.21 in last year's quarter. For the full year, management now expects a profit of $3.25 to $3.55 per share, as compared with $3.83 last year. These cuts are steep.

In the press release, the company cited a "challenged consumer and an intensified promotional environment. Management also said, "We reacted to softness in discretionary categories by leveraging promotions more than we originally planned." The company added that it expects stronger earnings growth "in early fiscal 2015."

When a discount, trade-down retailer notes that the promotional environment has intensified, we have to take notice, especially when its chief operating officer leaves the company to pursue other interests. Family Dollar may be pressured for some time, and management's commentary regarding stronger earnings growth in early fiscal 2015 makes us wonder how bad fiscal 2014 will be. It is clear to us that Dollar General (DG) is operating on a higher level.

Five Below

Specialty-value teen and pre-teen retailer Five Below updated fourth quarter fiscal 2013 guidance Thursday, and the update wasn't pretty. Same-store sales for the nine-week period decreased 0.5%, and the company now expects net sales for the fiscal fourth quarter to be in the range of $208 million to $210 million, down from the prior $214 million to $217 million. Comps are targeted at between negative 1.5% to negative 0.5% (vs. the prior plus 4%) and GAAP income is pegged at $0.43 to $0.45 per share, down from the prior expectation of $0.48 to $0.50). These are some fairly hefty downward revisions brought about by the shortened holiday shopping season, and exacerbated by poor weather conditions.

CEO Thomas Vellios cited "adverse weather" conditions and the shortened holiday season. He added that the company is "clearly disappointed with our holiday comparable store sales performance."

Pacific Sunwear

It's probably not too surprising that a firm striving to deliver all aspects of the "California" lifestyle would struggle amid icy winter storms across the U.S., but Pacific Sunwear did just that Thursday. The company noted that comparable-store sales through Jan. 4 (the "holiday period") were flat on a continuing-operations basis, excluding online sales. Including those results, comps sales edged up modestly, a showing that was below expectations. The performance prompted the company to lower its non-GAAP bottom-line outlook for the fiscal fourth quarter to a loss of between $0.18 and $0.21 per share, while its revenue target was revised down between $211 million and $214 million (from $216 million to $225 million).

CEO Gary Schoenfeld "primarily" cited "a decrease in traffic and softness in denim" for the company's below-par results in the first three weeks of December. Overall, he said, "it has been a choppy holiday season."

Sears

We weren't expecting anything but poor performance from Sears, but the retailer managed to miss even our lowered expectations when it provided an update Thursday. Same-store sales for the quarter-to-date and year-to-date periods ended Jan. 6 were abysmal. At the company's Kmart chain, comps fell 5.7% for the quarter and 3.7% for the year, while Sears Domestic stores showed comps losses of 9.2% and 4.2% for those periods. Given the worse quarterly declines, the performance even revealed that sales are accelerating to the downside. The weakness, moreover, was prevalent across the board.

The company now expects to report an adjusted operating loss of $2.01 to $2.98 per share during the quarter ending Feb. 1, and a loss of $11.85 to $12.88 per share for the year. Sears' operational days are numbered, with only a real-estate-liquidation scenario providing any real hope to shareholders. We note, however, that the real-estate thesis is getting crowded, too (see here).

Zumiez

Specialty action-sports retailer Zumiez announced that the company's comparable-store sales decreased 2.4% for the five-week period ended Jan. 4, compared with a decline of 1% in year-ago period.

The company has also lowered fiscal fourth-quarter guidance, now expecting sales of $226 million to $229 million and income of $0.56 to $0.59 per share (vs. the prior $230 million to $237 million and $0.60 to $0.66, respectively. The slashed expectations, management said, are "based primarily on lower than planned sales quarter-to-date, and to a lesser extent lower than planned merchandise margins." The company also cited "a low single digit comparable store sales decrease" for the quarter.

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